North Caucasus Economic Woes Likely Due to the Shrinking Role of the Central Government

In February, the Arbitration Court of North Ossetia declared the Vladikavkaz Thermal Networks joint stock company insolvent and put in under external management until June 1, 2015. Vladikavkaz Thermal Networks is a monopolistic public utilities management company in North Ossetia’s capital, Vladikavkaz. The company owed overall over $12 million and could not pay back its creditors (Kavkazsky Uzel, February 26).

This central heating utilities company from North Ossetia is among the many companies in the North Caucasus going through bankruptcy procedures as a tide of financial instability sweeps across the region. In the past four months, arbitration courts of the region received nearly 400 requests for bankruptcies. Public utilities companies, brickyards, chemical plants and other companies became insolvent. Electricity and gas networks companies are going bankrupt in North Ossetia along with a large agricultural plant and even a well-known soccer club, Alania. Due to bankruptcy procedures, Dagestan is set to lose a food processing plant in Khasavyurt, two brandy factories in Derbent, a bread-baking factory in Makhachkala, and so on. Karachaevo-Cherkessia is bankrupting, among others, a sugar-producing plant and a large brewery. Perhaps most surprisingly, a range of public utilities companies and state-owned enterprises are undergoing bankruptcy procedures in Chechnya. Ramzan Kadyrov is known for having rebuilt Chechnya after the war and for enjoying almost unlimited financial backing by Moscow, but even Chechen companies now appear to have run out of money as the economic crisis in the country intensifies (Kavpolit.com, February 24).

A few bankruptcies appear to be rooted in long-standing debts dating as far back as five years ago. Yet the wave of delinquencies has crested only now, probably for two reasons. The primary reason is a combination of financial and administrative considerations. Specifically, many public utility companies appear to be going bust. The government often subsidized those companies regardless of their ownership. Now, the central government in Moscow can no longer afford to keep inefficient enterprises afloat. The second possible reason for a wave of bankruptcies—less likely but also plausible—is that an orchestrated attack on local ownership of businesses is under way. The authorities in Moscow are connected to Russian oligarchs and big businesses that also tend to be based in the Russian capital. The poor economic situation in the North Caucasus is a good reason to buy up some of the lucrative assets of struggling companies in the region and make it even more dependent on the central government. Russian analysts have repeatedly asserted that Moscow would hold off on cutting financing for the North Caucasus until “the very last moment.” It appears that this moment has arrived fairly quickly—less than a year after a full-blown economic recession started in the Russian Federation.

The crisis has hit even in areas where the state of affairs appeared to be stable only three months ago. In particular, the leadership of Dagestan boasted of large investment by Moscow in the republic’s decaying military-industrial complex, especially Dagdizel, the flagship military manufacturer that produces torpedoes and is located in the city of Kaspiisk (see EDM, December 1, 2014). Dagdizel’s accounts were reportedly frozen at the request of the Russian Ministry of Defense, jeopardizing the jobs of about 4,000 of its workers (Kavpolit.com, February 24, 2015). Whether it is just a power struggle or economic delinquency is unclear at the moment. However, it appears that even Russian military industries are failing to provide stability for their employees.

A massive depletion of government jobs in the North Caucasus appears to be among the primary social consequences of the bankruptcies in the region. The general population of the North Caucasus, therefore, will likely be forced to rely less on the government for employment and move into the private sector, which means the regional dependency on Moscow will decline. However, the investment climate in the North Caucasus has been fairly unfriendly and is unlikely to improve soon. Governors of the North Caucasus republics and federal subjects appear to be out of touch with reality and do not know how to attract private investment and survive the crisis. Talk about import substitution industrialization is not matched by improving the investment climate (Kavpolit.com, February 23). A separate issue is whether there is much investment to be had given the current climate, with foreign financial markets closed to Russia and existing resources directed to the military industrial complex, the war in Ukraine and foreign policy adventurism in general.

The crisis in the North Caucasus economies arrived earlier than Russian economists expected and is already hitting regional economies hard. Moscow does not appear intent on continuing lavish financing for the North Caucasus republics in a time of crisis. North Caucasus governors, who are deprived of financial injections from Moscow, will have to either find common ground with private investors or face popular discontent.